At a Glance…
Floyd Mayweather, a world famous boxing champion, recently used his Twitter and Instagram accounts to help a company raise more than $30 million in an initial coin offering (“ICO”). Other celebrities have similarly capitalized on their “influencer” status by promoting digital tokens to their Twitter and Instagram followers. Token issuers raised over $3 billion via ICOs in 2017, and while many are concerned about a bubble, there is no sign of a slowdown. Some reports suggest that early stage companies have raised more money via ICOs this year than through traditional early stage venture capital funding. This growth in new token issuances has elevated the profile and “coolness factor” of token sales, and celebrities are paying attention. As ICOs continue to grow in popularity, issuers of tokens may increasingly seek to involve celebrities in their advertising and promotional campaigns.
The U.S. Securities and Exchange Commission (“SEC”) responded to this trend on November 1 by issuing a Statement on Potentially Unlawful Promotion of Initial Coin Offerings and Other Investments by Celebrities and Others (the “Statement”).4 The SEC issued the Statement out of concern that celebrities are in essence acting as unregistered securities brokers by soliciting investments on behalf of a token issuer.
The Statement explains that celebrities and others who use social media networks to encourage the public to purchase digital assets that qualify as “securities” are required to “disclose the nature, source, and amount of any compensation paid, directly or indirectly, by the company in exchange for the endorsement.” Failure to do so violates the anti-touting provisions of section 17(b) of the Securities Act of 1933. Moreover, the SEC warns that these influencers may also be committing fraud by “participating in an unregistered offer and sale of securities” and by “acting as unregistered broker[s].”
The SEC uses a multi-factor facts and circumstances test (the “Howey Test”) to evaluate whether a given digital asset is a security and is therefore regulated under the securities laws, and within the jurisdiction of the SEC. This analysis is not cut and dry. Moreover, the SEC may even characterize products that have a particular use case (“utility tokens”) as securities under the Howey Test if they are being issued before they are usable (“pre-functional tokens”).
While the SEC is the first U.S. regulator to specifically issue guidance on celebrity endorsements of ICOs, other federal agencies, including the U.S. Federal Trade Commission (“FTC”), have similar rules and regulations in place, and may eventually share their views on celebrity endorsements of ICOs. For example, in its Guides Concerning the Use of Endorsements and Testimonials in Advertising (“FTC Endorsement Guides”), the FTC requires endorsers to refrain from making false or misleading statements and to disclose any material connection to a product or company.5 In the context of social media, one of the many ways in which a celebrity or influencer can disclose a material connection is by using specific hashtags (“#hashtags”) identifying a post or statement as sponsored or paid. Celebrities and influencers who endorse ICOs using social media must take into account and comply with the FTC’s regulations and Endorsement Guides, especially if the influencer’s material connection to the token issuer is not immediately apparent.
Similarly, the U.S. Commodity Futures Trading Commission (“CFTC”) prohibits any person from making statements regarding the sale of digital assets that are untrue, materially misleading, or missing material information.6
Accordingly, celebrities who endorse or promote a token, or who use social media to encourage persons to purchase tokens, and the issuers of such tokens, must carefully consider whether their promotional language misleads persons regarding the merits of the token sale or the celebrity’s “paid spokesperson” status, and must also be mindful of the disclosure and other considerations that arise when the issuer is compensating an influencer.